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Mortgage Brokers
and Their Effect on the Market
100% of Loan Value - Bad Credit - No Credit -
No Income Verification... These are just a few of the catchphrases
touted in the many pages of listings under “mortgages” in the Pueblo
phone book.
Although banks also publicize their services in the yellow pages,
mortgage brokers occupy the majority of advertisement space in addition
to using a plethora of television and radio airtime.
Michael Larson of
Bankrate.com states that a study released last June estimated the
number independent mortgage brokers skyrocketed from about 7,000 in the
early nineties to approximately 36,000 by the end of 1998.
Unlike mortgage bankers, who are direct lenders, mortgage brokers
are middlemen who analyze the needs of a borrower and shop a number of
loan offerings from different sources to find the best ‘fit’ for their
client. And although dealing directly with a mortgage banker will
save the borrower broker’s fees, a direct lender often does not have
the number of offerings provided by a mortgage broker. If a borrower
goes to a local bank, they will only be presented with what that
particular bank has to offer, but if a borrower goes to a mortgage
broker they are able to choose from products offered by many sources.
However, it is wise to remember that mortgage brokers make their
profit on a percentage basis of the loan approved, and borrowers have
no control over what programs the broker may decide to present to
them. In other words, just because a borrower is dealing with a
mortgage broker, it does not mean that he or she is being furnished
with all the available choices the broker has to offer, or even the
choices that are best for the borrower.
Nevertheless, the business of mortgage brokerage is
booming. Wholesale Access, an industry research firm based in
Columbia, MD, states that mortgage brokers handled 70 percent of the
estimated $1.7 trillion worth of mortgages originated last year, up
from 20 percent in 1987.
Brokers are especially popular with borrowers who do not fit the
niche of those who qualify for a conventional, 30-year fixed rate
loan. For borrowers with less than stellar credit, first time
buyers with no credit, the self employed, and buyers of second homes,
the flexible services of a mortgage broker can seem like a dream come
true.
But there is a caveat in dealing with mortgage brokers. Due
to lack of regulation there are countless unethical brokers, many with
little or no lending experience, hoping to cash-in on a strong market
and lax laws.
Jack Guttentag, well known columnist and author of the Mortgage
Professor’s Web Site, warns consumers and lenders alike that “pretty
much, mortgage brokers are allowed to do their own thing.” He states
“The customer very often is very poorly informed and doesn’t understand
what it is, exactly, he is buying There are all kinds of
opportunities for mortgage brokers to rip them off.”
In our previous newsletter, we discussed how the appraisal
industry is both nationally and state regulated. However, unlike the
mandated laws of the appraisal industry and the directly regulated
controls of federally insured banks and thrifts, mortgage brokers are
not governed nationally and specific regulations vary widely state by
state.
As an example, mortgage brokers in Texas are required to maintain
a net worth of $25,000 or a surety bond of $50,000 and must also hold a
bachelor’s degree in banking, finance, or business administration in
addition to having at least a year and a half of lending experience.
Alabama requires mortgage brokers to show a net worth of $25,000,
submit three letters of character reference, three letters of reference
concerning lending experience, and pay an initial fee of $500.
But other states have much lower requirements and many do not
even order background checks for previous illegal activity.
Colorado merely requires filling out a form, paying a $75 fee and
passing an examination.
Kelan Brady, Securities Examiner for the State of Colorado, says
that Colorado only licences those who broker notes secured by a deed of
trust to private individuals acting as a lender. At this time there are
only about six mortgage brokers licensed in Colorado.
This lack of regulation and minimal obligation of financial
outlay, coupled with low interest rates and an active market, have
combined to create an environment ripe for fraud.
According to the Washington Post, FBI Director
Robert Muller III testified last month at a Senate Intelligence hearing
that only 102 investigations of mortgage fraud were conducted in 2001
compared with 550 investigations conducted during the 2004 fiscal
year. And the numbers are on the rise; Realty Times reports that
the FBI received 17,127 reports of mortgage fraud in 2004 compared to
only 6,936 in 2003.
Although the FBI has confirmed that mortgage fraud is a
nationwide epidemic, it has identified ten top hot spots: Georgia,
South Carolina, Florida, Michigan, Illinois, Missouri, California,
Nevada, Utah, and Colorado. Locally, the FBI is active in
pursuing mortgage fraud and are aware of several incidents of fraud in
Southern Colorado.
It must be noted, that mortgage fraud is often not perpetrated by
brokers alone. FBI Assistant Director Chris Swecker said during a
statement to the House Financial Services Committee on Capitol Hill
last October that 80 percent of all reported fraud losses involve
collaboration or collusion by industry insiders.
In a sophisticated fraud scheme, lawyers, title and escrow
workers, mortgage brokers, appraisers, mortgage lenders, or real estate
agents often conspire to get mortgages for more than the actual value
of the property and then bank the difference.
It is mandatory that Colorado appraisers report unethical
activity within the appraisal industry. Those who do not are in
direct violation of state law. To enable a more effective
mortgage fraud reporting mechanism for those not ordered to report
fraud activity, the FBI supports providing a ‘safe harbor’ for lending
institutions, brokers, and other mortgage professionals.
Assistant Director Chris Swecker states, “the ‘Safe Harbor’
provision would provide necessary protection to the mortgage industry
under a mandatory reporting mechanism. This will also better
enable the FBI to provide reliable mortgage fraud information based on
a more representative population in the mortgage industry.”
To that end, I.J. Hill Appraisal Services is asking ethical
appraisers to step forward and share information on provable
mortgage/appraisal fraud in Colorado. We can be reached either through
ihaservices2@quest.net or 719-545-0893.
By no means can the appraisal industry single-handedly halt mortgage
fraud, but with all honest real estate professionals working together
to ensure that only ethical practices are used we can put a dent in the
criminals’ operations.
It is of paramount importance to the mortgage industry that
honest appraisers are hired and are allowed to do their job free from
all pressure to inflate prices. The ‘make value or lose our
business’ ethic of mortgage brokers leaves many appraisers wondering if
brokers are ignorant of the fact that ‘pushing value’ is unethical, not
to mention illegal.
Are all mortgage brokers bad? Absolutely not. Unfortunately, the
dishonest element casts a long shadow on the entire group. But in
this age of rampant fraud, both lenders and borrowers must be aware of
the pervasive criminal element in today’s market.
As Kelan Brady states, “It's buyer beware in Colorado.” And it
would be sound advice to anyone doing business with a mortgage broker
to remember the old adage— if it sounds too good to be true, it
probably is.
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